When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming “fiscal cliff,” the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want – that’s what it means to be rich.)

So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn’t there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it’s a problem? Let’s go on and see if we get a hint of what the explanation for Reich’s concern with “the deficit problem” comes from.

But before we do that, let’s briefly note that Reich’s easy comment that taxing the rich more won’t harm the economy, isn’t quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there’s no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.

Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?

If we do too much deficit reduction too soon, we’re in trouble. That’s why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That’s the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don’t want to go there.

We certainly don’t want to go where Europe has been going lately. They’re a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there’s no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That’s not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it’s now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we’re still not out of the woods. So in the foreseeable future — the next six months to a year, at least — the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.

Of course, that’s true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely to involve a good bit of those kinds of cuts, if there’s any compromise at all with the deficit hawks on the budget.

But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.

Now we’re getting an inkling of what Reich’s problem is. He’s afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that’s true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there’s nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody’s is follish enough to downgrade US debt to below Japan’s rating.

This is why any “grand bargain” to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I’d make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.

Triggers are a really bad idea, and I’d hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren’t ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there’s no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich’s is a proposal for Obama’s opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It’s just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn’t become a means of avoiding deficit reduction altogether, that trigger should be built right into any “grand bargain” legislation – irrevocable unless two-thirds of the House and Senate agree, and the President signs on.

Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can’t take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how’s that working for Congress and the rest of us? It’s made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won’t hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we’ve got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we’re serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence – getting the economy back on track, and then getting the budget deficit under control. It’s sensible and do-able. But will Congress and the President do it?

If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let’s stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment’s thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Joseph M. Firestone, Ph.D. is Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He is also a Senior Fellow at Correntewire.com. Joe is author or co-author of more than 700 articles, blog posts, white papers, and reports on Knowledge Management, Policy Analysis, Political science, Economics and Fiscal Policy, Information Technology (distributed knowledge management systems, enterprise knowledge portals, web, enterprise, and KM 2.0), Adaptive Scorecards, Risk Intelligence, Social Science Methodology, and Psychometrics, as well as the six book-length publications. He has taught Political Science at the Graduate and Undergraduate Levels, and has a BA from Cornell University in Government, and MA and Ph.D. degrees in Comparative Politics and International Relations from Michigan State University. Currently, Joe also blogs regularly on economics and politics at Correntewire.com, FireDogLake, and DailyKos under the byline Letsgetitdone.

When he meets with Congressional leaders this Friday to begin discussions about avoiding the upcoming “fiscal cliff,” the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. (Taxes can be raised on the wealthy in the short term without harming the economy because the wealthy already spend as much as they want – that’s what it means to be rich.)

So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn’t there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them?

After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it’s a problem? Let’s go on and see if we get a hint of what the explanation for Reich’s concern with “the deficit problem” comes from.

But before we do that, let’s briefly note that Reich’s easy comment that taxing the rich more won’t harm the economy, isn’t quite true since since for every dollar taxed away GDP does decline by about $.30. Of course, that can easily be fixed by spending an equivalent amount to the amount taxed on something more productive than tax cuts for the rich. But since we can easily spend that amount of money on that more productive thing if we want to, anyway, there’s no reason to tax the rich more arising out of any imagined shortage of dollars. Of course, there are many more reasons to tax them, like justice, fairness, the desire to make them pay for ill-gotten gains, etc. But the need for money in order for the Government to spend on other things is just not one of them.

It all boils down to timing and sequencing: First, get the economy back on track. Then tackle the budget deficit.

Get the economy back on track, indeed. But, again, why is the deficit something that has to be “tackled”?

If we do too much deficit reduction too soon, we’re in trouble. That’s why the fiscal cliff is so dangerous. The Congressional Budget Office and most independent economists say it will suck so much demand out of the economy that it will push us back into recession. That’s the austerity trap of low growth, high unemployment, and falling government revenues Europe finds itself in. We don’t want to go there.

We certainly don’t want to go where Europe has been going lately. They’re a great example of how NOT to manage your way out of a Great Financial Crash. But what makes Reich and other progressives think they can avoid the fate of the Eurozone nations by planning for deficit reduction later ,or at all? The assumption here is that there must and will be a time when we can reduce the deficit without harming the economy. But what if there’s no such time? What if any substantial deficit reduction to under 4% of GDP, a figure envisioned in most of the deficit reduction plans being offered, means making the private sector poorer in the aggregate?

That’s not just a theoretical question. Right now, the US imports more than it exports in an amount greater than 4% of GDP. If we continue to do so, and the Government deficit is forced down to a number below 4% of GDP, then a private sector surplus in the aggregate will be literally impossible to attain, and, if we continue with such a policy, year after year, the private sector will lose more and more of its net financial assets as the Government eats the private economy in a fit of fiscal irresponsibility, that since it’s now way past 1984, the austerity advocates label fiscal responsibility.

Although the U.S. economy is picking up and unemployment trending downward, we’re still not out of the woods. So in the foreseeable future — the next six months to a year, at least — the government has to continue to spend, and the vast middle class has to keep spending as well, unimpeded by any tax increase.

Of course, that’s true, but the “vast middle class” can be impeded from consuming by cuts in discretionary Government spending and in social safety net spending equally effectively, and deficit reduction, without raising taxes on the middle class, is likely to involve a good bit of those kinds of cuts, if there’s any compromise at all with the deficit hawks on the budget.

But waiting too long to reduce the deficit will also harm the economy – spooking creditors and causing interest rates to rise.

Now we’re getting an inkling of what Reich’s problem is. He’s afraid of the “bond vigilantes” and their supposed power to raise interest rates and leave us with a great big interest bill that will further increase the deficit. So, all this concern over a “deficit problem” is due to fear of the markets and, perhaps, Reich would have no problem with running continuous deficits if he thought that the Fed, along with the Treasury, control interest rate targets, and that the bond markets are powerless to impose their will on Mr. Bernanke and the Treasury Secretary if they want to keep rates near zero, or at any other level of interest they would like the US to pay? Well, if that’s true, then let me assure Professor Reich that the bond markets and the ratings agencies are powerless to drive up interest rates against the combined determination of the Fed and the Treasury to keep them low.

We can see this if we imagine what would happen if the Fed continues to target overnight rates at close to zero, and the Treasury issued mostly 3 month debt. We know that short-term debt tends strongly to the overnight rate, and that there’s nothing the markets can do about that. So, if the Fed targets that rate at say 0.25%, and if the Treasury issues only short-term debt, the result will be that the markets cannot drive the rates much higher than that even if Moody’s is follish enough to downgrade US debt to below Japan’s rating.

This is why any “grand bargain” to avert the fiscal cliff should contain a starting trigger that begins spending cuts and any middle-class tax increases only when the economy is strong enough. I’d make that trigger two consecutive quarters of 6 percent unemployment and 3 percent economic growth.

Triggers are a really bad idea, and I’d hate to be among those 6% on the U-3 measure of unemployment, or the likely 12% on the U-6 measure, when the spending cuts and tax increases specified in the trigger mechanism occur, because those levels aren’t ones associated with a booming economy or one that is anywhere prosperous enough to stand against years of reduced Government spending at a deficit level below that necessary to compensate for the loss of aggregate demand due to our trade deficit. A trigger like this would take an already fragile economy, operating at way less than full employment, and would make unemployment higher, while it reduces private sector net financial assets during the years of deficit reduction triggered by such a plan. Depending on the details of the trigger, and assuming there’s no private sector credit bubble putting off the day of reckoning, a recession is a sure thing within an unpredictable, but relatively short space of time.

And keep in mind please, that this notion of Reich’s is a proposal for Obama’s opening bid, which presumably is open to compromise. So, perhaps Reich would be willing to set the deficit reduction at a compromise level of 7% U-3 unemployment? What a “loser liberal”!

But the real mistake here is in having any “trigger” at all. The whole idea is really dumb from an economic point of view. Fiscal policy needs to be guided by our expectations about its likely effects on real outcomes; not by some scheme that assumes that deficits are “bad” and must be minimized. We no longer live under the gold standard Professor Reich! A deficit is nothing more than the amount that Government spending exceeds tax revenue. It’s just a number!

To assess its appropriateness we have to place it in the context of what the private sector wants to save, and how much it wants to import, assuming the willingness of other nations to export to the US. The best fiscal policy is one that spends what the US needs to spend to solve its serious problems and achieve public purposes, and at the same time lets the deficit float as it will given such spending.

Of course, too much deficit spending can cause demand-pull inflation. But the proper remedy for that is to raise specific taxes and lower specific spending in such a way that price stability and full employment, as well as other good outcome result from fiscal policy. The size of the deficit or surplus is not a proxy for such real outcomes, and responsible fiscal policy should not be attempting to maximize, minimize or optimize either deficits or surpluses, rather than the real outcomes of government fiscal policy. In other words, run fiscal policy in accordance with expected real outcomes, and forget about deficits and surpluses per se. They should be treated as insignificant side effects, not as as centerpieces for fiscal responsibility, as they were under the gold standard.

To make sure this doesn’t become a means of avoiding deficit reduction altogether, that trigger should be built right into any “grand bargain” legislation – irrevocable unless two-thirds of the House and Senate agree, and the President signs on.

Please, no more foolish legislation that tries to constrain the freedom of action of future Congresses! The context of fiscal policy is always changing, and the Government must be adaptive to changing conditions. Future governments have to take into account things that have gone or are likely to go wrong. We should not, and really cannot bind them to “triggers” that can’t take into account the future conditions that may present themselves.

The fiscal cliff is itself an example of this principle. The “cliff”, after all, results from the sequestration trigger. And now, after agreeing to it, how’s that working for Congress and the rest of us? It’s made Congress look really, really stupid, and has only made it more obvious that the only crisis is what Congress has manufactured, and now refuses to fix in any way that won’t hurt the economy. And it has put the nation in a bind and subjected Congress to an immediate high pressure situation and the people to more “shock doctrine.” The agreement producing it was the last thing we needed. But we’ve got it, because people resorted to a “trigger.”

Now Reich wants to turn to another kind of trigger. But what we need instead is a return to real fiscal responsibility, and some education about what it means to have a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not our own.

The trigger would reassure creditors we’re serious about getting our fiscal house in order. And it would allow us to achieve our two goals in the right sequence – getting the economy back on track, and then getting the budget deficit under control. It’s sensible and do-able. But will Congress and the President do it?

If the main reason for the trigger is to stop the creditors from reacting badly to attempts to create an economy that produces full employment at a living wage and prosperity for all Americans, as well as a modern economy that fulfills our health care, educational, infrastructure, education, energy, climate change, and environmental needs, then I say let’s stop issuing debt and get the bond markets out of the Treasuries business entirely. That will certainly stop our interest costs from getting out of control and also render the bond vigilantes irrelevant to the finances of the US. Then neither Professor Reich, nor anyone else will have to give a moment’s thought to what “our creditors” think about our deficits, our national debt, or anything else we do.

Last time I looked, comparatively few of the bond market investors were actual American voters. So, why should they have any influence over what we choose to do anyway?

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Joseph M. Firestone, Ph.D. is Managing Director, CEO of the Knowledge Management Consortium International (KMCI), and Director of KMCI’s CKIM Certificate program. He is also a Senior Fellow at Correntewire.com. Joe is author or co-author of more than 700 articles, blog posts, white papers, and reports on Knowledge Management, Policy Analysis, Political science, Economics and Fiscal Policy, Information Technology (distributed knowledge management systems, enterprise knowledge portals, web, enterprise, and KM 2.0), Adaptive Scorecards, Risk Intelligence, Social Science Methodology, and Psychometrics, as well as the six book-length publications. He has taught Political Science at the Graduate and Undergraduate Levels, and has a BA from Cornell University in Government, and MA and Ph.D. degrees in Comparative Politics and International Relations from Michigan State University. Currently, Joe also blogs regularly on economics and politics at Correntewire.com, FireDogLake, and DailyKos under the byline Letsgetitdone.